Voxplainer on Scott Sumner & market monetarism

I have to admit that I usually dislike Vox. The twitter parody account Vaux News gets it kinda right in my opinion—they manage to turn anything into a centre-left talking point—and from the very beginning traded on their supposedly neutral image to write unbelievably loaded “explainer” articles in many areas. They have also written complete nonsense.

But they have some really smart and talented authors, and one of those is Timothy B. Lee, who has just written an explainer of all things market monetarism, Prof. Scott Sumner, and nominal GDP targeting. Blog readers may remember that only a few weeks ago Scott gave a barnstorming Adam Smith Lecture (see it on youtube here). Readers may also know that I am rather obsessed with this particular issue myself.*

So I’m extremely happy to say that the article is great. Some excerpts:

Market monetarism builds on monetarism, a school of thought that emerged in the 20th century. Its most famous advocate was Nobel prize winner Milton Friedman. Market monetarists and classic monetarists agree that monetary policy is extremely powerful. Friedman famously argued that excessively tight monetary policy caused the Great Depression. Sumner makes the same argument about the Great Recession. Market monetarists have borrowed many monetarist ideas and see themselves as heirs to the monetarist tradition.

But Sumner placed a much greater emphasis than Friedman on the importance of market expectations — the “market” part of market monetarism. Friedman thought central banks should expand the money supply at a pre-determined rate and do little else. In contrast, Sumner and other market monetarists argue that the Fed should set a target for long-term growth of national output and commit to do whatever it takes to keep the economy on that trajectory. In Sumner’s view, what a central bank says about its future actions is just as important as what it does.

And:

In 2011, the concept of nominal GDP targeting attracted a wave of influential endorsements:

Michael Woodford, a widely respected monetary economist who wrote a leading monetary economics textbook, endorsed NGDP targeting at a monetary policy conference in September.

The next month, Christina Romer wrote a New York Times op-ed calling for the Fed to “begin targeting the path of nominal gross domestic product.” Romer is widely respected in the economics profession and chaired President Obama’s Council of Economic Advisors during the first two years of his administration.

Also in October, Jan Hatzius, the chief economist of Goldman Sachs, endorsed NGDP targeting. He wrote that the effectiveness of the policy “depends critically on the credibility of the Fed’s commitment” — a key part of Sumner’s argument.

2 Responses to “Voxplainer on Scott Sumner & market monetarism”

Market Monetarism is nonsense. One important element in MM, namely that the authorities should target NGDP rather than inflation is hardly original in view of the fact that the Bank of England has been described as “closet NGDP targetter”. That is, during the recent crisis, the BoE did NOT ATTEMPT to keep inflation strictly at the 2% level because it thought a significant portion of inflation was cost push. Quite right.

A second nonsensical element in MM is the “monetary offset” idea. That’s the idea that fiscal stimulus is useless because the central bank will negate it. Well the obvious flaw there is that if the CB thinks there is scope for stimulus, why on God’s name would it negate that stimulus? And in fact during the recent crisis, central banks far from negating fiscal stimulus, backed it up (for example with QE). Perhaps the advocates of MM have never heard of QE.

A third nonsensical element in MM is the idea that stimulus should only take the form of the CB printing money and buying up privately held assets. That makes about as much sense as limiting stimulus spending to some other equally narrow sector of the economy, e.g. just the military or infrastructure.

1. MMs agree the BoE should ignore supply-side shocks. But they are not that good at guessing exactly which elements of CPI are supply-side (“cost-push”) and which are demand-side—look how NGDP has done through the recession!

2. If the Bank of England is willing to allow inflation to rise to 5.2% “because of” a change in the government’s budget, then why would it not be willing to allow it to rise to 5.2% “because of” a change in interest rate or asset purchase policy?

3. That is simply false. Portfolio rebalancing on surprise announcements means that QE doesn’t affect relative prices very much at all.